That way, when the company begins to earn a profit, the investors will get their money back — plus an extra slice of equity for taking a chance.
Companies looking for outside funding usually begin with a seed round. Then, some will continue on to Series A, B, and C rounds.
But before any rounds begin, a company valuation must take place. This can impact investor interest in the company and how much new capital a startup can bring in.
Startup Funding Rounds
The startup funding that gets the most news involves raising money through outside investment. In those cases, investors exchange capital for equity — or partial ownership — of the company.
The investment process is broken up into funding rounds. Funding rounds can be confusing. Let's look at each phase in the process and what it means for founders, companies, and investors.
Pre-Seed Funding
Pre-seed funding takes place as founders are getting their companies off the ground.
It's the earliest stage of funding a company. Pre-seed funding usually involves an investment from:
- The founder's personal savings
- Family
- Friends
- Supporters
- A network of other founders
This round can go on for years as a company develops. Or, if a company proves itself, it can happen rather quickly.
Seed Funding
Seed funding is the first official funding a company raises, and it's often tied to equity.
This capital helps a startup finance early steps, like:
- Conducting product research
- Launching a product
- Marketing to a target audience
- Building an audience
Think of this stage as the "seed" by which the rest of the company is able to grow and flourish. Without it, a founder wouldn't be able to hire a team or test their idea in the market.
Seed funding can come from family, friends, angel investors, incubators, or private equity firms.
Funding for this round varies. It usually depends on what resources the business needs to grow and what investors feel is worth their time and financial investment.
Series A Funding
Once a business uses its seed funding to develop a product and build a customer base, it's time for the next step. A Series A funding round can help to:
- Expand a company's product offerings
- Bring in more customers
- Develop a long-term plan for growth
Startups in this funding round often attract investors from traditional private equity firms.
Series B Funding
Series B rounds are about business development and how to reach the next level of growth. The capital raised in this round often supports:
- Hiring new talent
- Boosting sales
- Marketing
- Tech development
- Customer service
This funding round can attract both traditional private equity and later-stage investment firms.
Series C Funding
Series C funding rounds are for successful startups that need extra funding to:
- Create new products
- Acquire other companies
- Expand into new markets
- Hire an exceptional leadership team
- Boost numbers before an initial public offering (IPO)
Because these startups are already successful, this round of investment can be less risky. With that in mind, there are often more investors getting involved at this level.
Series C investors can include:
- Private equity firms
- Hedge funds
- Secondary market groups
- Investment banks
Series D and Beyond
Few companies extend beyond Series C into Series D or E rounds. Businesses seeking this funding are often looking for a final influx of capital to achieve their goals.
A company at this stage of funding should have an established customer base, revenue streams, a track record of growth, and a solid plan for how it will use new capital.
